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Pension consolidation is when you combine all of your old pensions into one single pension pot.
These days it’s common to have a number of pensions with different providers, often as a result of working for several different companies throughout your career. More often than not, when you leave a job, you leave that workplace pension where it is. Many people also have various private pensions, built up with more than one provider.
Approaching retirement is one of the most important times when you need to be looking at and reviewing your pension. As you approach retirement one of the biggest jobs you will probably need to consider is whether you should be consolidating your pensions.
Although it is when approaching retirement that most people begin to think about their pensions there is just as much reason and benefit to regularly reviewing pension arrangements over your working life. Pension growth happens over decades, and making sure that they are arranged in the bets way from the start will help them to grow as much as they can over the years. Naturally there will be less numerous pensions held the earlier you are in your working career but this doesn’t mean that it should all be left to retirement age.
This articles highlights some of the benefits of pension consolidation, which can have a big positive impact whether you’re still building up our pension or are getting ready to retire. Whilst there are some great benefits to consolidating your pensions there are also a few things it’s important to check before you do, so please read right to the end.
Older style pensions usually have limitations on where your pension money can be invested. You usually only have the option of using the pension provider’s own investment funds. By consolidating your pensions you can access the whole of the market ensuring you have the best investment strategy for your retirement plans.
There are 1,000’s of funds, stocks and other financial products in the world, and you want to choose the ones that are the best for you. But if you are restricted by your pension provider to only a small handful, its unlikely that they are the ones for you! More choice doesn’t mean you have to get more investments, it just gives you the chance of choosing a better one for you.
If you plan to be taking some money out of your pension in the near future but not all of it then your older style pensions are unlikely to have the functionality to do this. As such you may want to transfer your pensions in order to give yourself greater choice and flexibility with your retirement savings. Some schemes which were established before “Pension Freedoms” were introduced in 2015 may not have the flexible options that other newer pensions have. Income drawdown (also known as flexi-access drawdown) came into effect in 2015 and it allows you to access your pension savings whenever you need to from age 55 (increasing to 57 in 2028), while reinvesting your remaining funds in a way that is designed to provide an ongoing retirement income. If you retain an older pension, when the time comes for you to access it, you might have to transfer it anyway to another one in order to receive the benefits you are looking for. If you have never transferred your pensions before then it is likely the pensions you have are built for saving, not withdrawing. In order to get the full benefits of flexi-access drawdown (if appropriate for you) then you will need to transfer your funds to a pension that allows this feature.
One of the main potential benefits of consolidating your pensions is that there may be a reduction in charges. By consolidating your pensions you can use scale to reduce your overall charges.
This is particularly true of older style pensions which can quite often have old fashioned charging models which ultimately have higher costs. Today, most pension and investment platforms charge you less the more you invest.
Also, with some schemes, when the fund value of the pension goes above a certain amount, you get a discount which you may not qualify for if you spread the contributions across different providers.
If your pensions are all in one place, it can also help you to see if the underlying investment strategy is still suitable for you. Different pension providers offer different strategies – some might have 10 options while others might have many more to choose from. It’s about understanding what the right investment option for you is and then consolidating your pension savings into the right strategy.
Having lots of different pensions with different companies means receiving lots of different post/paperwork every year and having to contact multiple pension providers. Not only is this very time consuming to deal with (and it tends to get increasing worse over the years), it also makes it difficult to keep track of what pensions you have, where they are and what is in them. Pension planning works best when you know what your entire pot is made up from, so you can make the right decisions.
The other problem is losing pensions entirely. This is because over the years many pension companies get bought out by larger companies and also most pension holders tend to move house several times over their lifetime, resulting in pensions being forgotten and lost. The Association of British Insurers estimate that 1.6 million pension pots, totalling £19.4 billion, remain unclaimed
Receiving lots of statements and paperwork for different plans can feel overwhelming. With just one pension, it’s much easier to keep a track of everything and not lose any pensions.
Pensions come with many benefits (such as tax relief), but these go hand in hand with restrictions and limits on how they can be used. These allowances restrict things like the amount you can put into a pension each year tax free, and the amount you can put in over a lifetime before you start incurring punitive penalties.
As discussed elsewhere in this article, one of the advantages of consolidating your pensions is that you have a lot less paperwork to keep track of. If you only receive statements for one plan, keeping track of things like your remaining allowances becomes a lot easier and also leaves a lot less room for expensive mistakes.
This is particularly useful if you, for example, decided to make a large, one-off contribution and to make use of your pension carry forward allowance. It could easily end up being a huge task if you have numerous pensions that you’ve been contributing to, because you have to contact each provider for information and you’ll be held back by the slowest one of them. Then you have the task of working out how much of your allowance you have used with who and when, taking time and increasing the risk of an error and failing to use your allowances is the best way you can.
One of the main misconceptions about transferring your pensions into one is that you will reduce your investment diversity, which is not necessarily true. Quite often, when we’ve spoken to clients and looked at all their pensions, we’ve seen that they’re not diversified at all because they’ve stayed in the ‘default’ funds offered by each provider and these are often very similar – for example, they might be all UK funds. If you find a provider with a good selection of funds, you can have a range of investments all held within the same plan.
As part of the process of pension consolidations a good Independent Financial Adviser can also help you to trace old and forgotten pensions from previous employers, before you consolidate.
In the same way that it is easier for you to deal with the administration of just one pension instead of multiple pensions, the same can also be said on your death. Leaving your estate with multiple pensions can mean your family could find it difficult to understand what pensions you had and where to locate them. Imagine how hard it is for yourself to think of where all your pensions and the paperwork is, then picture how difficult it would be for someone with little or no knowledge at all of your pension arrangements. Pensions can easily be lost as there is no way of a pension scheme automatically knowing if a pension member has passed away,
Consolidating your pensions also means you only have to complete one death benefit nomination form rather than trying to remember to complete them for lots of different pensions.
Consolidating pensions into one pot makes monitoring their investment performance much simpler.
Pension providers report past performance in several different ways and send these report out at different times – one may come at the start of the year, another in the middle and therefore the other at the top.
If you’ve got only one pension, then you can better understand the performance of your your underlying pension investments. This helps to identify where you can improve, areas which are under performing and help track your performance against your retirement goals. This advantage goes hand in hand with the other benefits mentioned in this article, such as more investment choice, to contribute to a greater overall increase in performance.
Hopefully by now you can see there is a strong case for consolidating your pensions. However there are risks involved and it’s important to ensure you fully understand what type of pension you are giving up and any other consequences before you move it. Some of the risks to watch out for include:
Pensions mistakes can be expensive so it’s advisable to contact an Independent Financial Adviser for help if you are unsure.
This will be your first retirement, so you want to ensure it is done properly. If you need assistance making sense of it all we are happy to help.
Remember, you are in control of your pensions, you decide what you do with them.
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